How to do bond amortization

[Mike or Penny Novack]

On 3/7/2016 12:42 AM, Edward Doolittle wrote:
> I haven't looked at your example in detail, but in general, to switch from
> accounting on the seller side to the buyer side, you swap credits and
> debits, no?
Not necessarily in this case.

The problem is that "amortization" for the bond issuer is for 
establishment of a "sinking fund" so as to be able to pay the bond back 
at maturity.

Very different for the bond buyer. If the bond is bought at par (for the 
face value) there is no amortization. Before maturity the bond pays 
interest at the issued rate, and at maturity the entire face amount. The 
"amortization" problem comes in if the bond is either bought at a 
discount (for less than the face value) or at a premium (for more than 
the face amount).

But for how to account for that, check the rules of your jurisdiction! 
<< not a gnucash matter >>

For example, here in the US, you don't get to treat that (the gradual 
convergence to the face value over time) as a return of principle.  
Instead, it is considered as (you have to report as) INTEREST. In other 
words, the effective interest rate you are getting can be more or less 
than the issued rate. Remember, some bonds are issued as "discount 
bonds". Those might even have NO issued rate (0% interest) but are sold 
for a discount and the increases in value as the bond approaches 
maturity are its effective interest. That's what is meant in financial 
news reporting when they say that the interest rate of this or that 
"Treasury" bond (the 3 mo, the ten year, the 30 yea, etc.) has gone up 
or down. That is the effective rate (as opposed to any face rate) of the 
bond were it held to maturity, given the current price of the bond. Thus 
when the news says "Treasuries have fallen (in price)" that means the 
interest rate has gone up and vice versa.

But note, you have not actually received this interest as money. 
Instead, the debit side of the transaction is an increase in the asset 
value of the bond held (and the credit side, interest income).

ALERT: I am NOT a tax accountant, not "qualified" to give advice about 
something like this. Please either get professional accounting advice 
and/or look the matter up in accounting texts (ones suited to your 
jurisdictions). We who are telling folks how to do things with gnucash 
aren't "qualified" to tell you WHAT you should be doing (as opposed to 
HOW to do it once you know the WHAT).

Michael D Novack